Senators Seek Changes to Tax Bill as Busy Week Kicks Off

Pass-through business income, budget deficits and repeal of ACA mandate are all sources of friction

Sen. Susan Collins (R., Maine) objects to using the bill to repeal the individual mandate to have health insurance, and wants at least some state-tax deductibility allowed.
Photo:
Andrew Harrer/Bloomberg News

WASHINGTON—Senate Republicans began a frenzied week of negotiations to pass a landmark tax overhaul, grappling with several blocs of wavering GOP senators and trying to cobble together enough votes.

One group, including
Ron Johnson
(R., Wis.) and
Steve Daines
(R., Mont.), wants deeper tax cuts for so-called pass-through businesses such as partnerships and S corporations that pay taxes on individual rather than corporate tax returns. Both said they want to prevent large corporations from deducting state and local taxes, freeing up money to drive down rates for pass-through firms. They said they would like to support a tax bill but can’t do so yet.

Another group, including
Bob Corker
(R., Tenn.),
Jeff Flake
(R., Ariz.) and
James Lankford
(R., Okla.), is concerned about the $1.4 trillion addition to budget deficits the bill would cause, and these senators are wary that it won’t generate enough economic growth to pay for itself.

A third group, including
Susan Collins
(R., Maine) and
John McCain
(R., Ariz.), helped kill the Republican health-care bill earlier this year and could pose resistance over a variety of provisions, including plans to repeal the Affordable Care Act’s health-insurance mandate as part of the tax bill. Mr. McCain said Monday that he is still undecided and had “a lot of things” he is concerned about.

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Republican leaders were confident they would get the 50 votes they need to pass the bill. But placating all these groups will be challenging, politically and mathematically. Winning over some lawmakers could make others more resistant. The bill would collapse if any three Republicans vote no, assuming no Democratic support.

“It’s not going to be easy,” said
Sen. Orrin Hatch
(R., Utah). “This is going to be a tough, tough time.”

Messrs. Corker and Johnson are both on the Senate Budget Committee, which is slated to vote Tuesday. Opposition from either of them could stall the measure.

If the Senate passes the bill, lawmakers would then reconcile it with a somewhat different House version and aim to get it on President
Donald Trump
’s desk by Christmas.

The bill is the GOP’s biggest domestic-policy priority, and it would lower most households’ individual taxes through 2025 and cut the corporate tax rate to 20% permanently. Some households, particularly upper-middle-class wage-earners in high-tax states, would pay more than they do now because they could no longer deduct state and local taxes.

In the version that passed the Senate Finance Committee earlier this month, owners of pass-through businesses determine their business income and then subtract 17.4% of that from the taxable income on their individual returns. That gives the highest-earning owners of pass-through businesses a rate a little above 30%.

Mr. Johnson wants to increase the deduction to get the pass-through rate closer to the 20% corporate-tax rate or the 25% GOP leaders promised earlier this year. “They sort of left the pass-through community high and dry,” Mr. Johnson said late Monday of his fellow Republicans.

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Mr. Johnson said he spoke with Mr. Trump and Vice President
Mike Pence
about the issue over the weekend. “They agreed this is a problem to be fixed and we’ll get it fixed,” Mr. Johnson said Monday.

Before joining the Senate, Mr. Johnson ran a pass-through company in Wisconsin and still owns part of it.

Mr. Johnson said preventing corporations from deducting state and local taxes would create parity with pass-throughs and individuals, who wouldn’t be allowed to deduct such taxes under the Senate bill.

Unlike pass-throughs, however, corporations face a second layer of taxes on their profits. Mr. Johnson said the rate disparity proposed by Senate Republicans would cause pass-throughs to change their legal status and become traditional corporations. He said that would cause revenue losses that congressional estimators haven’t accounted for; it wasn’t clear Monday what those estimates assumed.

On the deficit front, Messrs. Lankford and Corker want the bill to include a mechanism that would adjust taxes in the event that Republican expectations that tax cuts would pay for themselves prove wrong.

Mr. Corker met with Treasury Secretary
Steven Mnuchin
on Monday to discuss the idea of a trigger or backstop. Mr. Corker, who said he has been in constant communication with Mr. Lankford about the idea, declined to say whether he would vote against the tax bill without a mechanism to change the tax code automatically in the event that revenue falls short of tax-writers’ forecasts.

“It is very important to me to know that we’re not increasing deficits,” Mr. Corker said. “If everybody is so confident that these revenue projections are going to be met, they shouldn’t be a problem.”

Independent estimates haven’t shown the bill hitting the GOP’s growth target. The official estimate—from Congress’s own nonpartisan scorekeepers—isn’t available yet, even for the House version that passed earlier this month.

Ms. Collins, meanwhile, objects to using the bill to repeal the individual mandate to have health insurance.

As a result of that policy and the expiration of individual tax cuts, the bill would eventually make many households worse off, according to the nonpartisan Congressional Budget Office and Joint Committee on Taxation. On average, households making under $30,000 would start seeing negative effects in 2019 and households making under $75,000 would become worse off in 2027.

Sen.
Rand Paul
(R., Ky.) said Monday morning that he would vote for the bill, even though he would prefer a larger tax cut.

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Mr. Trump tweeted Monday morning that there would be a few changes to help pass-through businesses and middle-income households. He met with Finance Committee Republicans on Monday and lawmakers emerged optimistic about the bill’s chances.

The changes for households could include allowing a deduction for property taxes, said a person familiar with the discussions.

Currently, taxpayers can claim an itemized deduction for state and local property taxes and for income or sales taxes, but the Senate proposal eliminates all of these breaks. Ms. Collins has said she wants at least some state-tax deductibility allowed.

The House bill repeals the income and sales tax breaks but won some votes from Republicans from high-tax states by preserving a $10,000 break for property taxes. One option in the Senate under consideration is to match—or even exceed—the House’s property-tax deduction, according to a person familiar with the discussions.

Lawmakers are also looking at changes flagged by business groups that have been poring over the legislation. The tax package went from concept to legislation in less than a month, and tax lawyers and businesses are worried about unintended consequences.

“Companies are still running their models. And I don’t know if anybody knows right now if they’re going to be worse off,” said
Catherine Schultz,
vice president for tax policy at the National Foreign Trade Council. “Companies are obviously talking to staff and trying to fix some of the problems in the bill, but right now [lawmakers are] much more concerned about making sure they get their 50 votes.”